Andrew Coyne: Why Canada needs its own fiscal cliff

Why Canada needs its own fiscal cliff: Andrew Coyne

What this country needs is a good fiscal cliff. I know, I know: the fiscal cliff — the combination of spending cuts and tax increases that kick in automatically at the end of the year if the U.S. President and Congress cannot come to a deficit-cutting agreement — is an invention, as artificial as it is arbitrary. Imposed by Congress, it could just as easily be revoked by Congress.

Even if no agreement were reached by Jan. 1, moreover, that would not mean the economy would immediately go into free fall. If the two sides were to strike a deal Jan. 2 instead, it would make very little difference. Whatever impact such a fiscal contraction would have on the economy, it could only be over a period of time. Some of us are skeptical it would do much harm even then.

But the perception that it would certainly tends, as they say, to concentrate the mind. Even an artificial deadline is better than none at all. It has a certain reality at that: while there’s no guarantee the two sides will be able to reach an agreement by then, there’s equally no guarantee Congress would be able to find the votes to wriggle out of the straitjacket it has fitted for itself. And lurking behind all this is the debt ceiling, which must periodically be raised or the U.S. government really will run out of money.

Well, you say, that’s them. The separation of powers in the American system is practically engineered to produce such brinksmanship, especially when, as now, power is divided between the two parties. It’s all too easy for either side to blame the other for the impasse. If that were not enough, the mad, bifurcated U.S. budget process, wherein Congress first decides whether to run a deficit (the budget) and then decides, in a separate vote, whether to fund it (the debt ceiling), is an obvious recipe for all sorts of mischief.

But if that’s the case, what’s our excuse? We have a parliamentary system, in which the executive usually enjoys absolute control over the legislature. Yet from 1971 to 1997 we ran 27 consecutive deficits, through good times and bad, with consequences that are still fresh in the memory. And we are now on track to run eight in a row — at least half of them under a majority government, in a growing economy.

Not that we are headed for the poorhouse any time soon. Even with the conspicuous overshoot reported in Tuesday’s economic and fiscal update — a deficit of $26-billion for the current fiscal year, versus the $21-billion forecast in March — the government’s finances remain in relatively good shape. A deficit of less than 1.5% of GDP looks positively provident compared to where most of the developed world is at the moment. Our debt-to-GDP ratio is steady, and projected to fall; at a projected 28% in 2018, it would be the lowest it has been since 1980.

So no, there is no reason to panic. That is, in a way, the problem. We all know why we finally came to grips with our chronic deficit problem in the 1990s: because we had run out of all possible alternatives. Not only were we spending 36 cents of every dollar just to service the debt, but we were beginning to run into the kind of market resistance to buying our bonds with which some European countries are now familiar. In short, we were on the edge of a fiscal cliff.

Absent that kind of crisis, it’s very hard to get democratic governments to act: in the long run, as someone once said, we are all out of office. You’d wish that governments could take the sorts of actions that were needed in advance, without having to wait for a crisis — that would, in fact, forestall the crisis from ever arriving. And to be fair to the Harper government, in some respects it has: raising the age of eligibility for OAS, for example, or reining in public service pensions. But governments often think they are doing enough, without ever getting in front of the problem.

It’s the insouciant attitude, more than the numbers, that is the most worrying part of the fiscal update: the absolute refusal to consider any acceleration of the leisurely unwinding of program spending from the astronomic levels to which it was pushed — a near 20% increase in one year! — in the calamitous 2009 budget. Yes, both deficit and debt are at manageable levels, now. But they seemed pretty manageable on the verge of past fiscal precipices, too. As late as 1977 the federal debt-to-GDP ratio was just 21%; a decade later it was over 50%.

From 1971 to 1997 we ran 27 consecutive deficits, through good times and bad, with consequences still fresh in the memory

The situations are different, of course. We’re not likely to endure the kind of high inflation and higher interest rates that exploded under the Trudeau government; neither are Ottawa’s social assistance and unemployment insurance obligations as open-ended as they were then. But if the financial crisis taught us anything, it is to beware the unexpected. The longer we continue to run deficits, the more exposed we leave ourselves to the elements.

Whatever the short-run risk, moreover, the greater challenge is in the long run: while the costs of population aging will fall mainly on the provinces, the feds are not wholly immune. What both levels of government ought to be doing now is running surpluses, to give themselves more room to borrow in the straitened years to come. That would pay dividends in the present, too: for what investors need most in the short term is confidence in the long term.

All of which is to say, if we cannot have a crisis imposed upon us, we need something self-imposed: some means of bringing future concerns to bear on the present, some legislated curb on our tendency to spend now and pay later, some rule, some deadline, some fiscal cliff.

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